Making Smarter Agency Finance Decisions Part 8 – Too Much Information

Simplicity Is The Ultimate Sophistication – Da Vinci

We instinctively feel comforted by information. So it’s only natural that, when faced by a decision, we take refuge in information.

It seems counter intuitive that, in these days of big data, growing computing power and access to almost every written word at the click of a mouse to worry that too much information is a bad thing for decision making. However the cognitive load of too much information means we have to have a plan about which information to concentrate on. To illustrate…..

These days I rarely go anywhere without checking out hotel reviews. This could be a very lengthy process but I focus on the worst reviews for the best hotels I want to stay in. If they can be dismissed as the ravings of a professional complainer I’ll book. That’s my KPI to save getting swamped by too much information. Focus on the nutters. It’s worked so far.

Surely more information will mean better decisions for Agency finances though? Perhaps, but I would argue that it’s counter productive when making decisions for Agencies. Let me explain.

The longer I work in Agencies the more and more I try to make things as simple as possible. One reason for this is practical – I have to explain what the numbers mean so it helps if they can be understood. To paraphrase Albert Einstein – if I can’t explain something simply enough I don’t know it well enough.

The second reason is I believe better, smarter decisions are made not by information but with insight.

Here’s why. Agency profitability is the long term outcome of decisions about how much to charge clients and how much to pay your team.

The effect on revenue and costs of each decision brings a clarity to the process. How much revenue will you gain or lose following the decision. How much additional cost will you incur or need to save. These are the questions to ask when faced with pitch pricing questions or the loss of a client. Simple questions with limited data required.

Looking at the standard ratecard and working out the margin based on salary and overheads and factoring in the discount that may be asked for to figure out what your margin might be is a spreadsheet too far. There are too many variables, too many assumptions that obscure the reality of the problem. Money in, money out. Figure that out and move on to the next decisions.

The same will most likely go for your P&L – to get what you need you only need a few figures; revenue, staff costs, overheads and headcount. The good stuff (profit, revenue per head and compensation to revenue ratio) can be worked out from those 4 figures.

Case Study

Too many accountants have over complicated too many sets of accounts. Agency finances may have their complications but at heart it is a simple exercise.

Probably the worst example of over complication was a client whose previous FD had tried to design a system based on a huge data dump of timesheets which somehow was supposed to work out the revenue. No, me neither – I didn’t understand it.

Instead of trying to follow the logic I went back to basics. Invoices, trial balances and a talking to people about revenue recognition. From having no information at all for 5 months they are now getting their simplified but helpful management accounts on the first day of the month. Much simpler. Much better.

Conclusion

Life can be confusing. There’s no need to make it more confusing. In this chapter the examples I have looked at have been revenue and cost based. But it holds true even in more complicated areas – try to find trusted advisors who can deal with the detail but explain your choices simply.

 

Making Smarter Agency Finance Decisions Part 7 – The Circle of Competence

“A Man’s Got To Know His Limitations” – Dirty Harry

We are better at some things than others. When you are not so sure what you are doing, it is riskier than when you do know.

Now that I’ve got the statements of the obvious out of the way I can make my main point. No matter how smart or experienced we are at what we do we will make mistakes when we go outside of our comfort zone; outside of our circle of competence.

The circle of competence is an investing concept used, amongst others, by Warren Buffett. He (and his investors) have got rich by investing only in companies they know really, really well in industries they know really, really well. Doesn’t it seem like a sensible approach written down like that?

Knowing what your Agency’s core competence is and who your preferred clients are, is key to decision making. It is not about refusing to go outside of your current limitations – the world changes too quickly for that. It is about acknowledging the risk and minimising it. Reading and listening (or employing) experts will work better and more often than blagging it.

I read an article about Brian O’Driscoll, the world class Irish rugby player, and he said something that resonated;  “Practise things you’re good at – Keep on top of things you’re not so good at, but be world-class at your best. Never think, I’m very good at this and that, I can leave those for a bit.”

Understanding your circle of competence, sticking within it and deciding to become the best you can at what you do is, as a core strategy, not a bad recipe for a profitable agency.

If you’re demonstrably among the best at what you do you will be more able to charge a premium which reflects the added value you can bring to your client’s business.

Venture outside your circle of competence into an area where you are just good (or worse) and you will be competing against specialists. It’s more than likely your price premium will be under pressure and there is the added risk of poor delivery affecting your reputation

Case Study

My career in marketing services started (well) before the digital age. I’m not a digital native – I started when having email was a novel and exciting thing.

Migrating an Agency, as I have helped to do, from offline to online is a challenge. You are automatically outside your circle of competence and won’t be, for some time at least, world class. Because our clients wanted us to help them and because we could see the way the world was going we ventured outside of our core competence.

We made plenty of mistakes. We tried to manage something we weren’t experts in. It turned out alright in the end but I can’t help thinking we would have approached it differently if we had recognised that this was outside our core competences. We should have been more strategic about what we could be world class at rather than taking any digital brief and then trying to figure out how to deliver it. We were too tactical and not strategic enough.

Conclusion

“To A Man With A Hammer, Everything Looks Like A Nail” – Mark Twain

Every time you go outside of your circle of competence you take yourself with you. Your experience, your knowledge. You will approach the problem with your particular hammer.

Sometimes this will work. Others it won’t. The risk of making a mistake will go up.

This is not a plea never to venture outside what you know. That world would be a dull place. Recognising you have gone outside of your core competence and doing something about it though, that seems like an exciting and reasonable thing to do.

Making Smarter Agency Finance Decisions Part 6 – Group Think

Group ThinkGroupthink:  A psychological phenomenon that occurs within a group of people, in which the desire for harmony or conformity in the group results in an irrational or dysfunctional decision-making outcome. 

One of the reasons meetings have a mixed reputation is the frequency with which tongues are bitten; opinions kept to yourself. Everyone around you seems to agree the right way to proceed, they seem to share the same opinion. Except you want to disagree but you keep quiet as you don’t want to seem out of step with the group.

There are sound evolutionary reasons why we like to agree with our tribe. Failure to do so could lead to exile and, in earlier times, hardship and possible death without the support of your people. However the maverick opinion, the challenge to orthodoxy, being the devil’s advocate is a vital part of making better, smarter decisions.

The unquestioning approach to decision making can lead to mistakes, even business failure. A much quoted example of Group Think (including Rolf Dobelli in his excellent “The Art Of Thinking Clearly”) is that of SwissAir. Known in successful times as the “Flying Bank” who flew straight into bankruptcy following an expansion plan based on past successes. There must have been executives there who privately questioned the direction they were taking. But they, and I suspect anyone with doubts, kept them to themselves and didn’t challenge the plan. Disaster soon followed.

One of my least favourite business slogans (and I have a healthy disdain for most slogans) is that “there is no I in team”. All teams, sporting or business, are made up of individuals who will have opinions about tactics, strategy and direction. You have to have teamwork but you also need individuals to feel comfortable to express themselves.

At some point a decision will need to be made by the manager of the group and at that point everyone needs to put aside their misgivings and help make the plan work. Until that point though they need to be encouraged to voice their opinion, constructively obviously, so that their experience and opinion, as an individual, can lead to a better team decision.

Case Study

I was a board member of an Agency many moons ago. It wasn’t a diverse group. Middle aged, white and male. Demographics aside it wasn’t diverse in opinion also.

A new director was appointed who wasn’t afraid to voice a contrary opinion. There were undoubtedly times when he was a pain but there is no doubt that discussions became more open and that better decisions were made. It might have been a coincidence but it was also a period of  significant growth for the Agency.

Arguments tested by debate will result in better decisions. Received wisdom accepted by groups will result in a narrower band of outcomes. Mistakes will be made and opportunities lost.

Conclusion

Making decisions can be difficult and there are times when they have to be made quickly and that’s a lot easier if it’s either one person’s opinion or a group who all seem to agree.

But if that is the way every decision is made the odds are they won’t be the best decisions.

If you work in an Agency make sure your opinion is expressed positively. Possibly in private to avoid any group pressure. If you don’t win the argument don’t keep coming back to it every time the subject is raised and certainly don’t say I told you so.

If you are running an Agency encourage debate. It won’t be hard to start if you have the time listen to and debate with your Team. One thing that is consistent with every Agency I’ve worked with is that there is no shortage of bright, engaged and opinionated people. If you don’t have that then you’ve got another, bigger, problem.

When the time comes though you will have to explain what your decision is and why. Hopefully everyone will back your decision but if  there is a dissenting voice welcome the debate. You’ll end up making  a better decision.

Making Smarter Agency Finance Decisions Part 5 – Reciprocity: The ties that bind

A05509Reciprocity: Noun; A mutual or cooperative interchange of favours or privileges

I’m guilty of using reciprocity here myself. I’ve written this blog (and planning on giving away a short book collating 10 ways to make smarter decisions) hoping to create a little reciprocity. If you’re reading and enjoying this maybe you’ll buy my book “Where is the Money?”. Maybe you’ll think your Agency could do with a FD who specialises in Marketing Services. That’s reciprocity.

It’s the principle a lot of organisations from drug dealers to charities work on: first give, then take. Maybe you’ll be immune to the principle of reciprocity and read the blog/book and move on. And that’s fine and how it should be

Reciprocity is a powerful survival tool. Share your bounty in the good times so that you are included in someone else’s successes in the future when you might not be so fortunate. It is common to every society and it is part of so many everyday transactions.

In business too, it is a powerful tool. Being aware of and using reciprocity should be inherent in our dealings with suppliers and clients. It’s the basis of good client service but when used strategically it can create ties that bind.

Suppliers will hope to create a feeling of reciprocity so that you feel obliged to use them. Whether it’s a free giveaway or a lunch it’s a well-worn tactic. Being aware of it and being ruthless about using the best value/cheapest supplier is undoubtedly the right choice but you will have to cut through any feelings of reciprocity that has been established. In the stricter regimes in the City even the muffin basket is turned away to avoid any possibility of reciprocity influencing behaviour.

This is why it is difficult to get the call when a client calls and says goodbye. You would not be human if you didn’t feel let down as they obviously don’t know how hard everyone had worked on the account. And that’s a hard truth to understand – working hard and producing good work isn’t enough to create reciprocity.

Only solving your client’s problems and becoming a trusted advisor rather than a supplier will help you establish reciprocity.

Case Study

I can’t quite believe this was 13 years ago but after 9/11 our biggest client, British Airways, faced catastrophe. No one was flying and they were looking around for every cost and cashflow saving they could make.

Looking back we took advantage of the bonds that reciprocity, during that difficult time, would create. We stepped up with drastic cost savings and a moratorium on cashflow. We shared their bad times so that when better times returned we were able to negotiate a far bigger share of the business. Every crisis creates an opportunity.

Now, not every negotiation or request for a discount is as dramatic as this was but it is always worth thinking whether sharing the pain will create an opportunity a little further down the line.

Conclusion

Meeting the brief and delivering on time will get you paid. Going above and beyond that will help establish reciprocity. Knowing when to go above and beyond is key in building long term relations. You might not get paid for it straight away but the long term relationships that reciprocity can build will pay dividends for years to come.

 

Making Smarter Agency Finance Decisions Part 4 – Beware Overconfidence

“The easiest thing in the world is self-deceit; for every man believes what he wishes, though the reality is often different” – Demostheneses

Confidence is contagious. Confidence can inspire. Confident people can lead. Over-confidence, on the other hand, can be deadly.

We all over estimate our abilities. Everyone thinks they are smarter, do more housework and are better drivers than other people.  92% of Swedes think they are better than average drivers.

Even as I’m writing this, possibly even as you’re reading this, the thought occurs “Yes, but I am better than average at…” The more expert you are at something the more this thought creeps in. The more you can point to a track record of achievement to back up your claims the more confident you will be.

And this is at the heart of the issue. Confidence is good. Over confidence is bad and we are extremely bad at judging when we cross the line

Case Study

Not a direct experience (thankfully) but it was a classic case of over confidence, bordering on hubris, a few years back about a very well regarded Agency who will remain nameless.

The Agency had a really good track record and an excellent client portfolio. The future looked rosy.

So confident was the founding partner that a generous dividend was paid out and a minority shareholder bought out.

Despite taking a lot of cash out of the business the confidence (misplaced as you might have guessed) in the future led them to take on a very expensive, long term, central London property lease.

Now, this could have had a happy ending but for losing their biggest client at the same time. The agency closed doors shortly afterwards – it had no cash buffer to fall back on and with lower revenues and increased overheads it wasn’t sustainable. Painful but in hindsight predictable. Too much confidence (based on past performance admittedly) led to taking too many risks.

Conclusion

Humility is always an attractive characteristic but what, realistically, can we do to make sure our justified confidence does not tip over into dangerous hubris? I suggest asking yourself the following questions about big decisions;

Is this decision within my core competences? If not, am I confident in the people I’m getting advice from? If so I need to listen carefully to them. Disagree with them if you are convinced but make sure you engage and understand the expert’s point of view.

Always ask yourself “what if”. What if we lose that client? What if we need to scale back/reduce running costs?

Always check on the key metrics. What effect does this decision have on our cash buffer? What will our compensation to revenue ratio be?

It boils down to asking yourself “What if I’m wrong?” Double checking your actions should never undermine your confidence. Check your logic with your peers or with experts in their field. Ask what is the worst that could happen if things go wrong? And then make the jump.